January 30th, 2007 Posted in Maryland | No Comments »
The following is an excerpt from an article written by Robert Freedman, for REALTOR MAGAZINE. 2006 was a tough year for home sellers and Realtors alike. From my own personal perspective I’ve seen more activity in the market since the begininning of December that we’ve seen for some months. I hope you find this article informative.
2007 Real Estate Market Outlook
On the Road to Recovery
If the second half of 2006 proved to be a tough period for residential real estate practitioners, “the good news is, the bad news is mostly behind us,” says NATIONAL ASSOCIATION OF REALTORS® Chief Economist David Lereah.
Lereah predicts that sales in many markets throughout the country are poised to pick up in 2007 and get on track for a full turnaround in 2008. He points to steadying mortgage interest rates, the top-out of home inventories, and declining new-home production as indicators that many markets are reaching a sustainable sales pace.
Look for good prospects in commercial real estate, too. “The U.S. economy is proving very resilient, and that favors commercial real estate,” says Kenneth Riggs, CRE, president and CEO of Real Estate Research Corp. in Chicago.
But while both residential and commercial have a few dark spots, 2007 promises to be a brighter year for real estate than 2006.
Residential market upswing
No doubt about it: “There was a lot of pain out there last year,” Lereah says.
On a national basis, home sales contracted by about 9 percent in 2006, to 6.5 million units from about 7.1 million units in 2005. And inventories rose about 36 percent to 3.8 million units available for sale nationally in mid-2006 from about 2.8 million units at the end of 2005.
But the slowdown looked very different depending on which market you were in. In 2006 it was a case of the higher you go the harder you fall.
Markets that experienced the hottest sales during the boom years-think fast-growth metro areas in California and Florida along with Washington, D.C.-are now facing the largest corrections. They’ll also be the last to turn around and may not see real improvement for a year or two.
Lereah calculates that formerly hot markets such as Miami comprise only about a quarter of all residential markets, but their size is such that they’re skewing national numbers downward, making the slowdown look worse than it is for the bulk of the country.
On a nationwide basis, NAR is predicting existing-home sales will dip slightly to 6.4 million units in 2007 from an estimated 6.5 million in 2006. New-home sales should ease to 1 million units from an estimated 1.1 million units in 2006. Price growth will stay relatively flat, inching down to 1.7 percent in 2007 from an estimated 1.9 percent for all of 2006.
Why low is good
Although no one likes to see low average price gains, a moderate slowing is essential for restoring vitality to the market, says Lereah. That’s because affordability is at the core of the current downturn.
Unlike past housing downturns, which were precipitated by slowing local economies, U.S. economic fundamentals remained solid, with 3.3 percent growth in the gross domestic product, job gains averaging about 150,000 a month, and interest rates remaining historically low during 2006.
Instead, home sales suffered because rapid price appreciation, fueled in part by an influx of speculators in hot markets, and higher interest rates pushed people out of the market. “Homes were no longer a bargain,” says Chen.
Negative media coverage about a housing bubble didn’t help either. “It became a self-fulfilling prophecy,” says James Gaines, a research economist at the Texas A&M University Real Estate Center in College Station, Texas.
A slight decline in prices will make it possible for more potential buyers to transact. Lereah estimates that for every 1 percent reduction in price gains, some 50,000 more buyers will return to the market.
Already, the pieces for a market recovery are falling into place. In addition to low national appreciation of 1.5 percent for 2007 and plenty of inventory in markets around the country, the Fed has stopped raising interest rates and appears to be holding to a neutral policy for the near future. Wages are also on the rise, up about 4 percent annually in 2006.
These factors are helping to improve housing affordability. After dropping to a low of about 100 in mid-2006, NAR’s Housing Affordability Index started ticking back up, and at the end of November was projected to stand at 106 at the end of 2006. At this level, a household earning the national median income would have 106 percent of the income needed to by a house at the national median price.
No quick recovery
Even so, it will take all of 2007 before sales start to grow again on a national basis.
In addition to the Miamis of the world that have big inventories to work through, there are a few markets, such as Detroit, where the slowdown isn’t a product of affordability but of a local economy in contraction.
With continued economic resiliency, the long-term outlooks for both residential and commercial real estate remain positive. Says Riggs, “We crossed 300 million people this year, and we’re getting 3 million people a year. Many of these people are getting jobs, they have the money to buy, and they have to live somewhere, so the trends are favorable for real estate across the board.”
